Question: What actions could SocGen have taken to prevent such large losses?
HEALTHSOUTH
HealthSouth is America's largest provider of outpatient surgery and rehabilitation services. It owns or operates over 1,800 facilities across the country and serves 70 percent of the rehabilitation market. It was founded in 1984 by Richard Scrushy, a former respiratory therapist who believed that effi cient one-stop shopping could be applied to the health care industry. From the time it went public in 1986, the Birmingham, Alabama, fi rm exceeded Wall Street expectations, a pattern that would continue for the next 15 years. In 1992 Scrushy aggressively began to acquire other clinics, and HealthSouth stock soared 31 percent annually between 1987 and 1997. Scrushy cut a charismatic fi gure; the headquarters housed a museum dedicated to his achievements. He fl ew his own jet, mingled with celebrities, and sang with a band. For his third wedding in 1997 he chartered a plane to fl y 150 guests to Jamaica. His workers knew him as King Richard. His management style impressed many analysts.
Fortune magazine described him in 1999 as executing his ideas brilliantly and said he was a taskmaster and a micromanager. Scrushy honed his technique, centralizing every piece of data imaginable. Every Friday a stack of printouts detailing the performance of each facility landed on his desk; when any one of them had a problem, Scrushy pounced. HealthSouth managed everything out of Birmingham: construction, purchasing, billing, even personnel. While this kind of top-down management may sound impossibly bureaucratic, Scrushy's troops made it work effi ciently. Needed supplies and authorizations arrived within 30 days. Administrators who couldn't hit budget targets were fi red. Says Scrushy, "We can call 'em and tell 'em, ‘Jump through hoops! Stand on your head!' "
However, behind the scenes was a pattern of institutionalized fraud. By the third quarter of 2002, the $8 billion company had overstated its assets by $800 million. According to testimony, the fraud began shortly after the company went public when Scrushy wanted to impress Wall Street. If the results were not what he expected, Scrushy would allegedly tell his staff to "fi x it." They would then convene in what came to be known as a "family meeting" to adjust the fi gures, a process they called "fi lling the gap." The internal accountants kept two sets of books-one with the true fi gures and one that they presented to the outside world. HealthSouth was able to keep up the deception in a number of ingenious ways that systematically fooled outside auditors. One scheme involved what are known as contractual adjustments. Sometimes the government or insurer would not fully reimburse a facility for the amount charged to a patient. This amount would be subtracted from gross revenues. In typical double-entry accounting, any loss of revenue has to be balanced by an increase in liabilities. HealthSouth simply failed to enter the liability amount.
Its accountants also posted regular expenses as long-term capital expenditures and billed group therapies as single-person sessions. They routinely infl ated the value of their assets. The practices were pervasive but individually so small that they rarely met the threshold levels that would trigger review by an outside auditor. The inside accountants were careful to make sure the adjustments were uneven and dispersed around the country so they appeared realistic. Five HealthSouth accounting employees have been convicted of fraud. Four did not receive prison sentences, though. Their lawyers argued that they were obeying orders, subject to constant intimidation, and relatively low on the organizational chart. The judge declared at sentencing that although three held the rank of vice president, "These four were essentially data entry clerks, regardless of their job titles."
Scrushy was fi red by the board on March 31, 2003. On November 4, 2003, Scrushy was indicted for securities fraud, money laundering, and other charges. He had maintained throughout that he was unaware of the illegal accounting practices. He was secretly recorded saying that he was worried about signing "fixed up" financials.
As part of the Sarbanes-Oxley Act of 2002, an executive has to certify the company's fi nancial reports. In August of that year, Scrushy signed that he had reviewed and endorsed HealthSouth's 2001 annual report and the second quarter report for 2002. He claimed on CBS's 60 Minutes program in October 2003 that he had signed because he trusted the fi ve chief fi nancial offi cers who prepared the fi gures. In June 2005, an Alabama jury cleared Scrushy of all charges, although the Securities and Exchange Commission (SEC) reached a settlement of $81 million with him in April 2007, consisting of a payback of $52 million of bonuses and interest as a result of an Alabama lawsuit, $17 million in a similar Delaware lawsuit, $1.5 million to settle a lawsuit brought by former HealthSouth employees, and other forfeitures and fines. Scrushy was also prohibited from serving as an officer or director of a publicly traded company for at least five years under the terms of the settlement.